General

We heard the rumblings and now it happened! Minimum down payment to buy a home in Canada has changed! At a press conference this morning the Finance Minister Bill Morneau, announced the Canadian government is making changes to the minimum downpayment in order to “encourage stability in the Canadian housing market.

Effective February 15th, 2016 for insured mortgages on properties between $500k and $1M. The new minimum down payment for insured mortgages is 5% for the first $500k and 10% on the portion of the price above $500k.

So for example a property worth $700k would be 5% x $500k or $25k plus 10% x $200k or $20k for a total downpayment of $45k. Which is a $10k increase from only 5% as per the previous rules. The new downpayment rules apply to new home buyers and do not impact existing mortgage holders.

The purpose of these new guidelines is said to help cool the housing market in Canada, with particular attention being focused on the hotter markets of Vancouver and Toronto. The government is trying to address future vulnerabilities by targeting higher priced homes while minimizing the impact to first time home buyers in moderate housing markets. “Our response isn’t being made out of fear, it is being made to manage potential risk appropriately, this is measured action aimed at creating a stable and effective housing market”.

Mortgage default insurance is required on all home purchases where the downpayment is less than 20%, while default insurance is capped at $1M. According to Morneau the changes will only impact one percent or less of the market.

For more information on how this may affect you please call or email me.

Discounted variable rate mortgages are very attractive. With Prime at 2.85% your FIVE YEAR variable rate mortgage could be about 2.20%. That’s a pretty great rate! Consider the average discounted fixed 5 year rate is 2.89%. That’s a .69% spread. On a mortgage of $350,000 amortized over 25 years with accelerated bi-weekly payments it’s a difference of $51.68 every 2 weeks.

So here are a few things to consider:

1) The Bank of Canada sets the Target Overnight Lending Rate which is what Canadian banks use to determine the Prime Rate. Generally, it is the pace of the economy (or lack of) and inflation which drives the Bank of Canada to stay, increase or decrease. So, when things are booming and inflation is rising, the BoC will raise the rate and decrease it when there are economic threats like dropping oil prices. Where do you think the economy is headed? Up, down or stay?

2) Variable rate mortgages are harder to qualify. Federal guidelines are that you must qualify at the Bank of Canada 5 yr POSTED rate which is now at 4.79%. This is great to protect you if the rate increases, however if your cash flow is tight or you need to maximize how much you can borrow then stick with the 5 year fixed rate. Its’ still a great option.

3) Changes in income? Is your income on an upward swing or downward? Will you be bringing in less money or more? The Bank of Canada typically increases the Target Overnight Rate at a quarter percent at each meeting so it tends to be gradual. No one really knows what will happen and in fact most of the economic projections last year didn’t see the current situation that caused the Bank of Canada to do a reduction. If there is an increase could you easily make the payment and how would it affect your other obligations? For example, with a 2.20% VRM increased by 1% on a $350,000 mortgage amortized over 25 years you will pay another $75.60 bi-weekly. Sure it’s more now but remember you saved interest costs before the increases.

4) Penalties. Life happens and sometimes you need to get out of your mortgage. The reasons are not important but what you need consider is the cost. Fixed rate mortgages prepayment penalties are almost always far higher than the variable rate mortgages. Typically a Variable Rate mortgage is 3 months interest while the fixed is based on the Interest Rate Differential. Note, all lenders have their own terms and conditions and ways they use to calculate the penalty so check with your Mortgage Broker first before you sign the dotted line.

5) Payment shock. If you want a variable rate mortgage and don’t want to be surprised when Prime increases in most cases, you can arrange to make a higher payment than the contract requirement. Think Prime will go up 1% in your term? You can have the payment set at that higher rate so there’s no shock and in the mean time you are paying down the principal.

6) Lock in. Most Variable Rate Mortgages allow you to change to a fixed rate mortgage at any time. Just remember you will get the rate that is available at the time – not what you could get today. Also, find out what kind of rate you can lock in to – will you get the best discounted for the remaining term or with the lender extend term with what they have to offer?

I recommend getting a comparison on what is available for you and discussing the whole situation with your mortgage broker. Make a qualified decision you can be comfortable with.

If you are looking at homes right now you’ve probably noticed there are some great deals on lived in homes versus brand new. The BC tax and GST make the brand new home a little pricey compared to the older home. It’s hard to NOT LIKE the new kitchen with granite counter tops, all the the hardwood flooring and modern plumbing in these new homes. And there’s nothing like the smell of new – even if it does cost more in today’s market. So what if you found the right home in the right neighborhood that was the right size and you love it but it is outdated and needs work? Well you might just have found yourself a home with an upfront equity benefit that makes much more financial sense just like you see in the the “Love It or List It” show, The Purchase Plus Improvements mortgage will actually reimburse the costs to improve your newly purchased home. All you have to do is get quotations for the work (and before you remove subjects is best) for the materials only or labour and materials. Then complete the work within 90 days of the purchase completion date. An appraiser confirms the work is performed and then your lawyer releases the funds that were held in trust. So that $40,000 renovation is added to your mortgage at today’s low interest rate. It’s that easy! Not all lenders will give you 90 days and $40,000 is the maximum allowed so get the details from a professional and experienced Mortgage Broker so it all goes smoothly!

Who owns your home? If you have a mortgage then you and the bank are partners. After the mortgage papers are signed and it is regisetered at the land titles office they still have a lot of say about your home. In fact, those terms and conditions really matter. A retired school teacher living in Sudbury, Ontario found out the hard way.

Robert Mc Ilvenna was told by a federal court judge that the Canadian Human Rights Commission did not err in dismissing his discrimination claim against Scotia for calling in his mortgage – despite his status as a licensed medical marijuana grower. The homeowner/mortgagee, Robert McIlvenna alleged that the only reason for the demand was “because the Bank has learned that there is cannabis growing on the property.” McIlvenna alleged the growing of approved medical marijuana was taking place because his son’s disabilities required the drug’s use.

The bottom line is that Scotiabank exercised its contractual right to call the mortgage because McIlvenna had violated terms which affected the value of the home and the equity position. And the bank won. See article http://business.financialpost.com/2013/06/26/scotiabank-pulls-mortgage-from-medical-marijuana-user/ So the moral of the story is don’t assume you have full rights to your home because as long as you have a mortgage your bank is your partner. Know and understand the mortgage terms and conditions. Every bank, credit union and mortgage company has a unique set of contract terms and conditions.

Okay it’s a bad joke I admit. I can’t imagine having to be evacuated from my home because of flooding. Especially with two dogs and a retired horse. I have to say though that four rate increases in the last week or so is stressful. It affects how much mortgage you qualify for and the monthly cash flow which for young families tends to be tight as it is. Remember that historically speaking the 5 yr fixed rate is still very low and still fantastic even at 3.49% – what some lenders are now offering. As you start rate shopping rememer BEWARE of the product terms and conditions. Mortgages ARE NOT created equal. That’s like saying I want a dog no bigger than 12 inches – well there’s many breeds that fall into that category!

And why are rates going up so fast anyway? Well the big investors are dumping bonds and their current low yields with the intent of buying them again when yields are higher. They were frightened by Beranke’s comment that the US Federal Reserve would stop buying bonds – hence the dumping of bonds and “free falling”. At the same time the stock market and gold markets are being sold. Nasty all at the same time. That’s a lot of selling at the same time.

Oh how these big guys play with our lives. Most of us just want to pay off our homes as fast as possible without worry and still live a good life.

The slowdown in the market actually benefits First Time Home Buyers because for the first time in years you can take your time to find the perfect home. Time gives you the opportunity to really get to know the area and the product available for sale. You also have far more choice and sellers are fairly motivated in Surrey, Langley and other areas of the Fraser Valley so there are some great deals available. Realtors have lots of time to do a full market research to negotiate the best purchase price. With time you can comfortably read and review strata documents for condos and townhomes without feeling pressured. You can actually get a property inspector to look at your home within a reasonable time. And you can get a fully pre-qualified mortgage with a 120 rate hold so there’s no need to worry loosing a great rate. Time gives you the ability to comfortably buy a home and feel that you made the best decision possible. So before the news discourages you think again – this is a great market for First Time Home Buyers.

Lots of disturbing news lately. Great concern about theUS credit downgrade and the debt crisis in Europe. The stock market ups and downs earlier this month show investors’ worry and there is a fear that the U.S. could slip back into Recession. Just great. Here we go again right? Well maybe not so gloomy. Apparently these economic conditions will actually help Canada’s real estate sector stay healthy according to Mathieu Laberge, deputy Chief Economist at CMHC. Home sales and construction activity will cool but remain healthy in the second half of the year, due to favorable economic conditions that push up demand for homes. Lower unemployment, a steady level of immigration, and low interest rates are working together to prop up Canada’s real estate industry. In Canada employment is expected to grow at a moderate pace in the next few years and interest rates to remain flat for the remainder of the year and increase in 2012. Sounds good to me. If he is right we escape yet another financial crisis. Oh it’s so great to live and work in Canada!

So still some confusing information out there on the new guidelines. As I posted earlier, the maximum time you can amortize (or spread) your mortgage payments is 30 years effective March 18th. That means you must have your purchase or refinance completed by March 17th. Completion is the date that the LEGAL mortgage documents are signed at the lawyers/notary and new funds advanced and the title to the property is registered at Land Titles Office. That’s not to be confused with the mortgage term. That is just the length of your contract with the lender and confirms the rate and agreement during that time.

There are still some lenders that will allow longer amortizations. That catch is that you have to have at least a 20% down payment.

If you are an employee you can still buy a home with a 5% down payment. Gifted down payment from an immediate family member is still allowed. Also, there are still a few lenders that are able to to provide a FREE down payment and meet the federal requirements. Credit and job stability make it tough to get into this program but it is available.

Self-employed home buyers need a minimum of 10% for a down payment. It must come from their own resources so it cannot be borrowed or gifted.

I know it sounds a little complicated. Honestly though it’s up to your mortgage professional to keep up on the guidelines and know which bank offers the best product for the type of mortgage you need.

Once again everyone with a Variable Rate mortgage and line of credit can breath a sigh of relief! Yes, the Bank of Canada keeps the Key Lending rate unchanged. The Bank of Canada’s 1% means a Prime Rate of 3% for us consumers.

Still wondering where Prime is headed? Well you must realize that 1% is incredibly low. In order to stimulate the economy during the recession the rate hit rock bottom and was raised in September to 1%. How much longer it will stay there will depend on many things. The Bank looks at the economy here in Canada and globally. Things like inflation, employment, exports and our dollar impact it’s decision.

While we didn’t expect a rate hike now most economist project one early as May or as late as the end of the year. We will know more at the next meeting when the Bank of Canada’s governing board is expected to send a clearer signal on April 13, when it next issues its quarterly outlook for Canada and the world.

This is probably one of the most often asked question. Discounted variable rate mortgages are very attractive. At Prime less .75% for a five year VRM your rate right now would be 2.25%. That is pretty great mortgage rate. Currently, the average five year fixed term mortgage rate is 4.00%. That’s a pretty big difference. So here are a few things to consider:

Variable rate mortgages are harder to qualify. Due to new federal guidelines a CMHC insured variable rate mortgage must use the current Bank of Canada qualifying rate of 5.44%. If you are tight on income or maximizing the mortgage amount then you will more easily qualify on the five year fixed rate of 4%.

Changes in income? Is your income on an upward swing or downward? Are you going to be bringing in less money per month or more within the next year to five years? A variable rate mortgage can save you money now while Prime is low however can you handle the payments if Prime increases to 5 of 6%? That’s more than doubling the payment. Can you easily make the payment and how would that affect your other financial obligations? And don’t forget your lifestyle. It could drastically change things for you so make sure you review your monthly budget and do a “what would happen if ” scenario.

Also, be careful of variable rate mortgages that keep the payment amount the same even when Prime changes (up or down). One way to get around this is to anticipate a higher interest rate and set the mortgage payment at that amount. The bonus is that while Prime is low you will be paying down your mortgage faster because the difference is directly applied to the principal.